India's Post-Colonial Buying Spree

A recent Indian TV commercial for a mouth-freshening chew provides surprising insight into the business climate on the Subcontinent. The scene is modern-day London, and a young Indian tycoon passes a billboard for the East India Company, the giant British trading firm that dominated India's fortunes for almost 200 years. His immediate reaction: buy the company (in hopes of enticing aspirational Indians to buy the product, as well).

If the East India Company was still around, it's likely an Indian firm would be looking into an acquisition. Flush with cash, corporate India is on an investment spree, and Britain, the old colonial master, last year became the favorite target. Indian investment in Britain has more than doubled in the past three years, surpassing the U.K.'s own investment into India. Indians are now the second-biggest investors in London—home to 19 percent of the national economy—topped only by acquisitive Americans. "I don't think that even 20 years ago anyone would have visualized this," says Subir Gokam, chief economist at the Indian ratings agency Crisil. "We'd still have been imagining ourselves as a Third World country subordinate to the U.S., Britain and everyone else."

On a mission to India last month Prime Minister Gordon Brown spoke of a new "partnership of equals," one that the British hope will include freer trade with India, which despite its stellar growth, can still look more protectionist than peers such as China. While the only headline-making British buy in India last year was Vodafone's $11 billion purchase of a controlling stake in the Indian cell-phone outfit Hutchison Essar, Indian businesses have been snapping up a clutch of iconic British brands, including Tetley, Whyte & Mackay whisky, and Corus, a last fragment of British Steel, acquired by Tata last year for $12 billion. For good measure, Tata now looks set to take carmakers Jaguar and Land Rover off the hands of Ford.

Meanwhile, India's superrich flock to buy expat homes in the poshest areas of London. According to estate agent Savills, which staged its first road show in India last year, in 2007 Indian buyers bought more than 10 percent of London properties sold for £4 million or more, topping even the Russians.

The attraction to Britain has little to do with post-colonial revenge. Start with the presence of at least 1.3 million residents of Indian descent, a shared legal system and familiar language. And Britain is unusually open to big acquisitions by foreigners, of all nationalities. Indian-born steel baron Lakshmi Mittal ran into a firestorm of local criticism when he set out to acquire the French steelmaker Arcelor in 2006. In Britain, the Indian purchase of Corus passed almost without comment. "The relationship has never been better," says Alan Rosling, a director of India's multinational Tata Sons: "As an investor from India there are few places as open, as welcoming and as hassle-free for investing as Britain."

And that's the rub. If Britain is open to foreign investors, India remains decidedly cautious. Legal hurdles to foreign investment remain highest in key sectors like financial services or retailing, where British companies are strongest.

Gordon Brown may be trying to encourage better bilateral trade relations with political carrots, such as emphatic support for a permanent seat for India on the U.N. Security Council. But with elections due within the next 15 months, Prime Minister Manmohan Singh is unlikely to push through contentious reforms. "Change will happen very slowly," says Julius Sen, an expert on international trade at the London School of Economics. "There is a perception in India that international investors will just go for the low-hanging fruit." The cliché isn't entirely without merit; while Indian banks maintain a network of low-profit rural branches, it's unlikely a British incomer would. India's micro-stores would likely be driven out of business by Western behemoths.

Indians argue that there has been significant dismantling of trade barriers already. "It's now more a matter of which sectors you can't invest in, rather than which you can," says Mukesh Rajani, who runs the Indian desk of PriceWaterhouseCoopers in London. Andy Scott of the Confederation of British Industry notes that unlike in totalitarian China, "in India you pay the price of democracy," a price that involves concessions to public anxiety over the impact of foreign investment. A robust political system in which leaders have to trouble themselves with election outcomes may be the Raj's last great bequest to India; British business will have to live with the consequences.